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The New York City COVID-19 landlord-tenant Guaranty Law rendering personal guaranties of commercial lease obligations unenforceable may be constitutional

New York

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USA

New York City’s COVID-19 Guaranty Law Rendering Personal Guaranties of Commercial Lease Obligations Unenforceable Is Not Struck Down In Melendez v. City of New York, No. 20-4238 (2d Cir. 2021), the plaintiff landlords challenged the constitutionality of certain New York City laws affecting landlords and tenants that were enacted in response to the COVID-19 pandemic. The plaintiff landlords requested a judgment declaring the challenged laws unconstitutional and for an injunction permanently enjoining their enforcement. Case History The challenged laws included New York City’s Residential and Commercial Harassment Laws (N.Y.C. Admin. Code §§ 22-901 et seq., 27-2004 et seq.), which prohibited “threatening” tenants based on their COVID-19 status, and the Guaranty Law (N.Y.C. Admin. Code § 22-1005), which rendered certain personal guaranties of commercial lease obligations unenforceable.The plaintiffs argued that the Residential and Commercial Harassment Laws violated the Free Speech and Due Process Clauses of the First and Fourteenth Amendments by restricting commercial speech in the ordinary collection of rents and failing to provide fair notice of what constitutes proscribed threatening conduct.The plaintiffs further alleged that the Guaranty Law violated the Contracts Clause by rendering certain personal guaranties of commercial lease obligations unenforceable.The United States District Court for the Southern District of New York granted the defendant’s motion to dismiss the complaint for failure to state a claim. Second Circuit Reverses in Part On appeal, the United States Court of Appeals for the Second Circuit upheld the District Court’s ruling on the Residential and Commercial Harassment Laws but reversed the lower court’s ruling on the Guaranty Law.Residential and Commercial Harassment LawsThe Second Circuit concluded that the plaintiffs did not plausibly plead that their lawful commercial speech was infringed. The plaintiffs’ pleading alleged that the impugned laws prohibited landlords from making routine rent demands from delinquent tenants. However, the Second Circuit affirmed the District Court’s ruling that the plain meaning of the text did not support that interpretation.The Second Circuit also rejected the plaintiffs’ Due Process challenge. The plaintiffs claimed that the Residential and Commercial Harassment Laws were unconstitutionally vague. The Second Circuit stated that the challenged amendments’ prohibition on “threatening” conduct could not reasonably be understood, or misunderstood, to prohibit routine rent demands (at 44).In summary, the Second Circuit affirmed the ruling of the District Court, which held that the plaintiffs failed to plausibly plead that the amendments to the City’s Residential and Commercial Harassment Laws violated either the First Amendment (by restricting commercial speech in the ordinary collection of rent) or the Fourteenth Amendment’s Due Process Clause (by failing to provide fair notice of what constitutes proscribed threatening conduct) (at 107).Guaranty LawThe Second Circuit reviewed the Contracts Clause challenge to the Guaranty Law under the three-part test set out by the United States Supreme Court in Energy Rsrvs. Grp., Inc. v. Kan. Power & Light Co., 459 U.S. at 411-12. The inquiry considers the extent of (1) substantial impairment, (2) significant and legitimate public purpose, and (3) reasonable and appropriate means (at 74-75).The Second Circuit held that the Guaranty Law imposed a substantial impairment to the lease agreements by permanently and unexpectedly repudiating commercial lease guaranties for arrears arising over a sixteen-month period (at 78, 83). However, the defendants showed that the Guaranty Law had a plausibly legitimate public purpose (at 89).As a result, the question of whether the Guaranty Law was a reasonable and appropriate means to serve the defendant City’s stated public purpose could not be decided in defendants’ favor as a matter of law and, therefore, the Second Circuit ruled that the plaintiffs’ Contracts Clause claim could not be dismissed for failure of the complaint to state a claim on which relief can be granted under Rule 12(b)(6) (at 90).The Second Circuit remanded the case back to the District Court.

April 14, 2022
Melendez v. City of New York, No. 20-4238 (2d Cir. 2021)
New York Courts